Brazil could raise US$1.1 billion from minimum tax on multinationals – study

RIO DE JANEIRO, BRAZIL – After years in dispute, the G-7 group of seven largest economies signed a landmark agreement to tax multinational companies at a minimum rate of 15%, which may bring about a change in the tax war scenario between countries, and could even give Brazil a tax collection boost of €900 million (US$ 1.1 billion) per year.

The calculation was disclosed in simulations performed by researchers at the European Union Taxation Observatory, an independent tax research laboratory based at the Paris School of Economics.

The study considers several scenarios for the implementation of the global tax. According to simulations, the United States would have an extra €40.7 billion in revenue and the European Union another €48.3 billion. Should the tax rate increase from 15% to 25%, the revenue for the European Union would reach €168 billion and the Americans would get €166 billion. Brazil would collect €7.4 billion (almost R$56 billion).

The Brazilian government has not yet made an official statement on the agreement, announced a week ago by the G-7 countries (Germany, Canada, USA, France, Italy, Japan and the UK). Brazil’s official position should be known in the next G-20 meeting (comprising the world’s 20 largest economies), when the agreement will be discussed.

Last week, Brazil’s Federal Treasury officials attended a technical meeting at the Organization for Cooperation and Development (OECD), which is working together with the G-20 to seek a solution to what is known as the “erosion of the tax base” of countries with the migration of corporate profits to tax havens and also for taxing the so-called digital economy.

This erosion occurs because large multinationals migrate their profits to low-tax countries. This is merely an accounting exercise. Companies’ turnover is done on paper, with no increase in production capacity, by artificially moving profits to be taxed at a very low rate. In practice, multinationals set up a subsidiary in a tax haven and perform a series of accounting operations to focus all tax profits there.

During Donald Trump’s administration, the U.S. was at odds with tax increases. But with the arrival of President Joe Biden, the Americans began to adopt a conciliatory position aimed at implementing the agreement.

The agreement comprises two pillars. The first, of greater interest to the United States, is to set the minimum rate for the global taxation of multinationals at 15%. The second, of interest to the Europeans, concerns the so-called digital economy and how to tax the intangible services of large technology companies (Google, Amazon, Facebook, and Apple), including personalized data processing algorithms and other digital services.

“These features make it easier to move profits from one place to another and ultimately pay no tax at all,” explains Ipea economist Rodrigo Orair.

The U.S., where “big techs” are located, has agreed to tax part of these companies’ profits at the destination (where the service is consumed), and not only at the source. This was a demand from European countries and some of them are now charging a temporary tax until the G20 agreement is closed – India is one of the countries that oppose the concept.

Pacification

According to Orair, the agreement promises to interrupt a war of sorts between countries. The international situation is very similar to the dispute that occurs in Brazil, where some municipalities charge a lower ISS (services tax) in order to attract large companies. “Lower tax rates will not mean the end of the fiscal war, given that mechanisms may be adopted to deduct a larger amount from the tax calculation base, thereby reducing the tax to be paid,” says Orair. This is what has been done by many municipalities.

However, he says that the agreement was a signal that the U.S. has come to an understanding with the 4 European Union countries within the G-7 and that the proposal will be forwarded more forcefully for an agreement within the G-20.

“The leadership of the G-7 lessens the weight of opposing forces,” says Manoel Pires, coordinator of the Fiscal Observatory at FGV. According to him, prior to the agreement there was pressure for countries to try local solutions, but there was always fear of retaliation.

Pires believes that the change suggests that further progress is possible. He explained that the global minimum 15% tax applies to multinational companies. For example, should it introduce the tax, Brazil will be able to tax its own multinationals.

Domestic rates will continue to be set locally. “In the case of multinationals, if the company is taxed at a lower rate in the country where the profit was calculated (such as a tax haven), the country of origin may charge the difference to reach the minimum rate,” says Pires. In other words, if a Brazilian multinational is taxed at 2% in a tax haven, Brazil may charge the difference to reach 15%.

According to him, as the corporate income tax rate in Brazil is high (34%), it is likely that multinationals will continue to benefit from this type of operation.

In the case of digital services from large technology companies, Orair says that caution is required when analyzing their impact, because Brazil taxes imports of services and remittances. This has led many of these companies to open branches in Brazil. To have a greater impact, other gaps will need to be closed, he says. Should Brazil wish to introduce the global tax, it will have to change its local income tax legislation. The progress in the international agreement comes at a time when Congress is trying to pass part of the tax reform.